Bond yields fall as reversal in rate rise cycle looms

Yields on government bonds fell on Friday, after the Reserve Bank of India (RBI) kept policy rates unchanged and hinted at a reversal in the rate rise cycle.

Yields on the 10-year benchmark government bond closed at 8.38 per cent, 11 basis points lower from its previous close.

“From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth,” RBI said in its mid-quarter policy review statement. The regulator left the repo rate unchanged at 8.5 per cent, as downside risk to growth has intensified. The central bank also kept the cash reserve ratio (CRR) unaltered at six per cent.

In November, bond yields touched a three-year high of nine per cent on higher government borrowings and concern that elevated inflation levels may delay the rate reversal cycle. However, bond purchases by RBI via open market operations (OMOs) brought yields below nine per cent.

“With the change in RBI’s stance, upward pressure on the benchmark 10-year government security yield is expected to ease. The yields on 10-year government bond has already been easing in response to RBI’s OMOs,” said Dharmakirti Joshi, chief economist, Crisil.

The apex bank said it would continue to address liquidity issues by conducting OMOs. “Long-term bonds appear to have factored in much of the positives and is likely to take further cues from fiscal management and budget,”said Chaitanya Pande, head-fixed income, ICICI Prudential AMC.

RBI has infused about Rs 24,000 crore in three consecutive OMOs, conducted since the start of the second-half borrowing programme of the government. According to the revised borrowing plan, government may borrow Rs 52,800 crore in excess of the budgeted Rs 4.17 lakh crore.

“Paper supply concerns remain and, the lack of a more detailed OMO buyback calendar in this regard means the bias for yield movement is likely to be on the upside,” said Abheek Barua, chief economist, HDFC Bank. He expects the 10-year benchmark bond yield to trade in the range of 8.40-8.75 per cent in the near term.

The regulator said there were no signs of stress in money markets, though liquidity deficit had tightened in November. However, the marginal standing facility (MSF) remained unutilised reflecting no sense of urgency in infusing liquidity. “There are no significant signs of stress in the money market. The overnight call money rate is stable around the policy repo rate and liquidity facilities such as MSF remain unutilised,” it said.

On Friday, banks borrowed Rs 1,48,470 crore in two repo auctions conducted by RBI. The central bank had provided an additional repo facility for a day, keeping in mind tight liquidity conditions on the back of advance tax payments. The interbank call money rate shot up to 9.75 per cent on Friday as banks borrowed to tide over tight liquidity. The collateralised borrowing and lending obligations rate also rose to 9.75 per cent on Friday.